ST Engineering - CIMB Research 2017-11-09: Tech-savvy

ST Engineering - CIMB Research 2017-11-09: Tech-savvy SINGAPORE TECH ENGINEERING LTD S63.SI

ST Engineering - Tech-savvy

  • ST Engineering's 3Q17 net profit of S$128m (+15% qoq, +68% yoy) missed our expected S$150m.
  • 9M17 net profit at 62% of our previous FY17F and 70% of Bloomberg consensus.
  • Marine unit beat our expectation on stronger repair; aerospace, electronics and land system missed due to lower volume and slower yoy growth.
  • STE guides for ‘comparable’ PBT (or +-5%) in FY17. We forecast a positive swing in 4Q17F, driven by volume pick-up in aerospace and marine.

Key highlight of the results briefing: land system’s newly acquired 

  • US robotics business in autonomous mobile robot (AMR) and its potential in 2-3 years ahead.
  • Group core profit up yoy, qoq Core profit rose qoq and yoy to S$128, but we had expected higher profits. Order book stood at S$13.3bn at end-3Q17, with 3Q17 order wins of S$530m (-18% qoq) from aerospace and S$585m (+19% qoq, +21% yoy) in electronics. 
  • Net cash including investment was S$37m at end-3Q17.

Aerospace seeing upcycle for engines, PTF outlook positive 

  • Aerospace 3Q17 PBT of S$66m (+2% yoy, -16% qoq) missed our S$72m expectation.
  • Aircraft maintenance & modification PBT declined 17% qoq and 30% yoy due to delayed award of VIP refurbishment jobs. Components, engines repair & overhaul PBT grew 74% yoy and 63% qoq to S$17m upon the long-awaited return of cycle for CFM engines; this could continue to 2022. 
  • Engineering & material services profit dropped 39% qoq due to higher passenger-to-freighter (PTF) prototype costs for A330-300 and A330-200.

Electronics single-digit yoy growth, margin uncompromised 

  • Electronics 3Q17 PBT of S$56m (+5% yoy, +7% qoq) was below our S$63m expectation on lower-than-expected revenue, due to timing of projects recognition. The division only posted 5% yoy growth for the quarter, below its historical 10% growth in 3Q. 
  • However its 3Q17 PBT margin stayed steady at 11% (1H17: 9%), suggesting that despite the competitive landscape and strong orders secured in the past two years, there are still pockets of profit from government agencies/defence jobs, in our view.

Land system – I am a robot 

  • Land system PBT of S$15m (-49% qoq; 3Q16: S$41m loss) missed our expectation of S$22m due to completion of a chunky defence automotive project in 2Q17. 
  • Munition sales was steady but profit was slightly below our forecast. 
  • US spending on infrastructure continued to benefit its US operations-- Lee Boy (road paver) and Hackney (F&B truck).

Land system’s latest buzz is the robotic 

  • TUG AMR (via the acquisition of Aethon in 2Q17) -- it has > 30% of global market share (2,000 units) and is deployed in 140 US hospitals.
  • Marine seeing glimpse of light Marine PBT of S$21m (2Q17: S$8m losses) was above our S$18m expectation, driven by stronger-than-expected ship repair/conversion. There was also some provision for doubtful debt reversal from its oil & gas exposure. ST Marine and Tuas Power is the preferred bidder to build the 5th desalination water plant in Singapore (by 2020) with a 25- year concession (to 2045). This helps to buffer STE’s weak shipbuilding order pipeline.

Maintain Add, higher TP of S$3.85 

  • This is a safe index proxy. 
  • Key re-rating catalysts could include stronger-than-expected pick-up in aerospace MRO and marine’s shipbuilding (having been in the doldrums since oil prices crashed). 
  • We cut our FY17-19F EPS by 4-6% to reflect slower yoy growth in electronics. As we roll over our valuation to FY19F, our TP (still based on blended valuations (22x CY19F P/E, DCF and dividend yield) inches up to S$3.85.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-11-09
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.85 Up 3.820